Monthly Archives: September 2013

HM Government Interest on Debt.

HM Government expenditure comes from our taxation and borrowings. How is this money spent ?

HM Government collects about £580 Billion in Taxation and has to borrow a further £120 Billion on the global banking and financial markets (the Bond Market). We are running a deficit, spending more than we earn.

With this approximate £700 Billion, where does the cash go ? Here are the rough numbers:-

£202 Billion Benefits and Pensions
£202 Billion Health
£69  Billion Education
£42  Billion Debt interest
£36  Billion Defence
£30  Billion Local government
£26  Billion Scotland
£19  Billion Law and Order
£14  Billion Wales
£10  Billion Northern Ireland
£8   Billion EU contributions
£7   Billion Transport
£6   Billion International aid
£125 Billion Other departments

Total government spending £698 Billion.

£42 Billion on Debt Interest, this is the interest HM Government has to pay on the bonds (Gilts) issued to fund the deficit. We spend more on our interest repayments, than we spend on defence. What is worrying is that with an aging population, the cost of pensions and healthcare are going to rocket. Looking after our elderly families is essential, and our retired population of about 12 million deserve decent pensions. However when debt interest payments on the ballooning debt mountain are non-trivial at £42 Billion, cutting the welfare, state pension and health budgets is simply too easy for governments. We need underlying investment assets to pay decent pensions for our retired citizens.

The Numbers @ AT&T.

The 2nd most famous communications company is AT&T, American Telephone and Telegraph.
[BT Group PLC is the most famous telecommunications company]

Looking at the annual report and financials some key information can be found.


Revenues of $126.4 Billion = £78.9 Billion

What is very interesting is that break down.

19% on Voice
28% on Data
53% on Wireless

$20.4 Billion = £12.7 Billion  in capital expenditures & and spectrum purchase.
Paid out more than $10 Billion = £6.24 Billion in regular quarterly dividends
1,300 scientists and engineers at AT&T Labs

Key financials:

Total assets $272,315 Million = $272 Billion = £169 Billion
Total debt $ 69,844 Million = $69 Billion = £43.6 Billion
$4,868 Million held in cash and cash equivalents

Voice revenues decreased by 10.0%, in 2012 primarily due to declining demand for traditional voice services by our consumer and business customers.

Pension benefit obligation at end of year $58,911 million = £36.7 Billion
Fair value of plan assets at beginning of year $45,907 Million = £28.6 Billion
Unfunded status at end of year $13,851 million = £8.65 Billion

Yes, AT&T has a Pension Deficit.

Number of employees 241,810
106 Million Wireless Subscribers.

American Telephone and Telegraph, the North American Giant, like a lot of companies, the pension fund is deficit. In mature economies, the aging population and retired workers living longer are putting a financial strain on pension funds.

BP: The Oil Major

BP (Formerly known as British Petroleum) is a giant. It started life as The Anglo Persian Oil Company, then via huge expansion globally, and acquiring companies in the US such as Atlantic Richfield (Arco), Amoco and in the UK, Burmah Castrol is an energy giant, but also a financial giant, with massive treasury operations, and huge financial trading operations.

A member of the FTSE-100, accounts for nearly 5% of the FTSE-100 Index.

With a Market capitalisation of about £83,000,000,000 = £83 Billon, the dividend yield is 4.8%.


Reading the annual report can get a grasp of the financial position, and despite the 2010 tragic Deepwater Horizon accident, the company is still vast.


BP employ nearly 86,000 people.
Capital expenditure to be in the range of $24-27 billion per year
2012 Profit was US$ 11,582 Billion = £7,234 Billion
Balance Sheet cash and cash equivalents at the end of 2012 totalled $19.5 billion.
Dividends to shareholders of $5.3 billion = £3.31 billion during the year.
BP owns 19.75% of Rosneft, the Russian energy giant.
Total revenues and other income in 2012 = $388,285 million = $388 billion = £242,536million = £242 billion
[UK 2012 GDP = £1, 483 Billion, BP revenues = £242 billion.]
BP revenue = 16% of UK GDP !!
Balance sheet assets  of £187,510 million = £187 Billion

Major Shareholders:

Guaranty Nominees Limited 27.05 %
BlackRock, Inc. 5.39%
The Capital Group Companies, Inc. 3.88%
Legal & General Group Plc 3.82%

A World Class Energy Giant.


Fund Focus: Legal & General Managed Monthly Income (over 4% yield)

In the abnormal climate of low interest rates, finding a decent income is exceptionally hard. Pension funds, pensioners, or investors looking for an income, are struggling to find anything that returns anything over 3%.

However, there are investment funds that can offer over 4%.
The Legal & General Managed Monthly Income Unit Trust, is a £390 Million fund, holding 425 individual investment holdings, and today is yielding 4.3%, and what is incredible, this fund pays out to investors on the 21st day of each month.


The top ten holdings account for 14% of the overall fund. These are all bonds issued by these companies in UK Sterling (GBP)

BARCLAYS BANK PLC (GBP 10%, 21-May-2021)
PRUDENTIAL PLC (GBP 11.375%, 29-May-2039)
HSBC HOLDINGS PLC (GBP 6.5%, 20-May-2024)
E.ON AG (GBP 6%, 30-Oct-2019)
EDF SA (GBP 6.125%, 2-Jun-2034)
ENEL SPA (GBP 5.625%, 14-Aug-2024)

Very interesting to see some of the bonds issued by blue chip companies and the coupon paid, yes 10% by Barclays, 11.375% by Prudential and 6.5% by HSBC. It is incredible to see, these 3 giants in global banking and financial markets, need to offer creditors (the purchaser of these bonds) such a large interest rate. The cost of capital is huge. Of course, one has to be logical and scientific, and it is my assumption, but perhaps for example Barclays when it tapped the fixed income market with this bond issue at 10% maturing in May 2021, raised the money during the financial crisis of 2008, where only the brave were willing to buy bonds from financial institutions, and only credit worthy organisations were able to tap the bond market. It is always about timing.

A fund that offers a monthly return, but it is not a deposit account, the risk is the potential of default from the bond issuer.

Verizon Bond Issue

On Wed 9th of September, Verizon, the US Telecommunications giant, issued some bonds. Nothing new or unusual in that. Except, this issue, was to raise US$49 Billion = £30.7 Billion.

It was the largest ever corporate debt sale in history. They issued US$49 Billion worth of bonds in 8 blocks, that were a mix of fixed and floating-rate debt spread across six different maturities that ranged from three years to 30 years. The interest (the yield / coupon) on the pile of debt was over 5%.

Clearly the money being raised is to finance the purchase of the 45% of Verizon Wireless that is owned by Vodafone PLC. The sale of these Verizon bonds, was managed by Barclays Plc, Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley.

5% yield in these near zero interest rates, Verizon are rewarding investors with a generous interest rate.

Lloyds Banking Group: Re-Floatation Begins

Yesterday, HM Government’s UK Financial Investments (UKFI) sold 6% of the shares held in Lloyds.The price obtained was 75p a share, raising £3.2bn for HM Treasury. The disposal cuts the government’s stake in Lloyds from 38.7% to 32.7%.


Interesting to read the press release from HM Treasury.

A profit has been made from the sale, which will be used to pay down the national debt…….The money will be used to reduce the national debt by over half a billion pounds

Makes a change to see a reduction in the UK National Debt.

The $17 Billion Apple Bond….potential losses

In April this year, Apple raised US$17 Billion, by issuing bonds. They were raising cash as a part of a programme to return cash to shareholders via the most tax efficient process.
The issue was done in 6 blocks (parts), these offerings from Apple included benchmark maturities of three-year, five-year, 10-year and 30-year fixed rate bonds, along with three-year and five-year floating rate notes.

Now what is curious, and not widely reported (you have a dig a bit to find it, all public), that the 30 year bond issue was for $3 billion is now underwater.
Issued with an interest rate of 3.85%.

At issuance it is worth 100 Cents on the Dollar.

Today  nearly 5 months on after issue, the 30 year Apple bond is trading on the bond market (fixed income) at about 95 Cents on the Dollar. Yes.

So now with these bonds that are traded are worth $2.85 Billion.
Thus investors are now nursing paper losses on these bonds. Incredible.

Sovereign Wealth: The ADIA

The Abu Dhabi Investment Authority is the world’s largest sovereign wealth fund


The money from the sale of oil and gas from the Emirate of Abu Dhabi, is then given to the Abu Dhabi Investment Authority, to invest globally, and provide an income to Abu Dhabi, but also de-risk and diversify the reliance on the sale of oil and gas.

Created in 1967, has developed a Portfolio with this break down:

Development Market Equities      32.00% – 42.00%

Emerging Market Equities            10.00% – 20.00%

Small Cap Equities                       1.00% – 5.00%

Government Bonds                      10.00% – 20.00%

Credit                                           5.00% – 10.00%

Alternative                                    5.00% – 10.00%

Real Estate                                   5.00% – 10.00%

Private equity                                2.00% – 8.00%

Infrastructure                                1.00% – 5.00%

Cash                                             0.00% – 10.00%

The Abu Dhabi Investment Authority does not publish the assets under management, but it is considered to have about US$800 Billion = £505 Billion.

Salient Information:

9.9% stake in Thames Water. Approximately 80% of ADIA’s assets are managed by external fund managers. Approximately 60% of ADIA’s assets are invested in index-replicating strategies. 1275 Employees.

BG Group PLC

The BG Group is one of the UK’s largest oil and gas exploration and production companies.


A member of the FTSE-100, related to the former British Gas, BG-Group is a result of the de-merger of the Lattice Group, British Gas UK and is effectively the exploration and production arm of the old British Gas. Today, with a market capitalisation of about £41 Billion, it is an UK giant, and a world player on the energy market.

Looking at the financial statements [], the company is excellent shape.

A balance sheet of £65 Billion in total assets and only £32 Billion in total liabilities, thus the shareholders have £33 Billion in Equity in the company.

Looking at the annual report [] one find some useful information.

page 29: [$2.1 billion equivalent of hybrid bonds issued in three tranches and maturing in 2072]

page 29: [net borrowings were $10 624 million]

page 33: [Some of the major risks involved in BG Group, activities cannot, or may not, reasonably and economically be insured.]

page 76: The Major Shareholders:
BlackRock Inc 7.6%
Legal and General Group plc 3.52%
Norges Bank 4.48%

Very interesting to see that some of the bonds issued by BG Group mature in 2074, paying an annual interest rate of 6.5%. That rate is incredible.


Yes, able to borrow on the bond market, for 61 years. What this means, is that creditors are willing to lend to BG Group, getting a fixed income on their money of 6.5% each year until 2074, as they must be confident in the long term ability (financial credibility) of BG Group to meet all its debt obligations. Thus they have confidence in the credit worthiness of BG Group. A very stable company.


The Power of Pensions Funds: The Ontario Teachers’ Pension Fund

The Ontario Teachers’ Pension Plan is a world class active investor. It is also one of the largest pension funds in the world.


Based in Toronto, in the province Ontario, Canada, it looks after and pays the pensions and investment plan assets on behalf of 303,000 working and retired teachers. Incredibly only established in 1990.

Canadian $129.5 Billion in net assets = US$124.9 Billion = £79.5 Billion
10.1% Annualised rate of return since 1990

The Fund:

Equities $59.5 Canadian Dollars, 47% of the Fund
Significant Investments
Camelot Group plc (UK National Lottery)
Hitachi Ltd.
Michael Kors Holdings Ltd

Fixed Income $60 Canada Dollars, 48% of the Fund
Significant Investments
Government of Canada nominal and real return bonds
Canadian and international corporate bonds
U.S. treasury inflation protected securities

Commodities $7 Canada Dollars, 5% of the Fund
Significant Investments
Commodity derivatives

Real Estate $28.7 Canada Dollars, 23% of the Fund
Significant Investments
Toronto Eaton Centre shopping and office complex
Toronto-Dominion Centre shopping and office complex
Lakewood Mall, California
Copenhagen Airport A/S (Infrastructure)
GCT Global Container Terminals Inc. (Infrastructure)

Total Assets of $127.3 billion

A long term investor, looking after the futures of Ontario’s teachers. Intersting to see that it an active investor in Infrastructure investments, an investment class that is becoming more mainstream as an underlying investment that gives stable and steady returns.

Dividends:Calculated Costs

Vodafone PLC is selling its 45% shareholding in Verizon Wireless, and later in the year will get about £84 billion (US$130 billion)


A lot of this money will be returned to Vodafone shareholders via a special dividend. This got me thinking about the Vodafone dividend.

Today, owning shares in Vodafone, is quite handy in these times of 0.5% interest rates. The yield on Vodafone stock is about 4.8%.

So £100 invested in Vodafone stock today will earn £4.80 a year.

So what is the cost of the dividend to shareholders from Vodafone ?

In 2013, Vodafone has paid 2 dividends:

7 August 2013 Final dividend 2013 payment of 6.92p

6 February 2013 Interim dividend 2013 payment of 3.27p

That is 10.19p for the year. [£0.1019]

Now, the total number of voting right shares in Vodafone is 48,450,408,385.

Thus, the cash to fund the Vodafone 2013 dividend is 48,450,408,385 x £0.1019

= £4,937,096,614. YES, £4,937 Million = £4.937 Billion.

To pay the 2 dividends this year, Vodafone needed £4.937 Billion in cash to meet this payment.
Our pension funds need companies like this, that reward long term investors.

Fund Focus: Life Sciences & Global Health

The life sciences sector of the economy offers to bring better healthcare, quality of life and a better understanding of diseases that affect us all.

Some very high tech companies are working in this area, take mySymptoms from Skygazerlabs, [] a privately held business, that has some very clever technology.

One can get access to quoted (listed) Bio Tech and Pharma companies with investment funds like the Legal & General Global Health and Pharmaceuticals Index Trust


The top 10 holdings in the fund portfolio are:

Johnson & Johnson (US)
Pfizer (US)
Novartis (Switzerland)
Roche (Switzerland)
Merck & Company (US)
Sanofi (France)
GlaxoSmithKline (UK)
Novo Nordisk (Denmark)
Amgen (US)
AstraZeneca (UK)

These represent almost 50% of the Trust by market value and consist of the 10 largest pharmaceutical companies in the world.

A £63,952,194 fund (£63.9 million) that gives access to the one of the most critical sectors of the market.

The National Grid and its Debt

The one the largest utilities and infrastructure companies in the world is the UK’s National Grid PLC. []

Because of the nature of its business, hard physical assets (gas pipelines, electricity network, substations, transmission lines, liquid natural gas [LNG] storage) National Grid is able to borrow huge quantities of money to finance its day to day capital intensive operations and able to meet debt repayments from the cash flow of its business.

It borrows on the Bond Market and one can see the various programmes of bond issuance.

Looking at this debt profile [] one can see it has a debt profile of about £2bn£1bn of debt each year maturing for the next 20 years.

When you add up all this debt (bonds outstanding) it equates to:

£21.4 Billion = £21,400 Million = £21,400,000,000.

The creditors of these bonds, such as pension funds, fixed income unit trusts, income ISA’s etc are getting a stable and safe income and have the reassurance of the debt secured against hard assets and also from a company with strong and regular cash flows.

The Power of Monthly Investment

I read this article of the IFA Hargreaves Lansdown, on the benefits of regular savings:


It shows how £150 a month over 25 years has become £275,000, when the £150 a month was invested in a fund (unit trust).

The article shows that £150 a month, over 25 years = £150 x 12 x 25 = £45,000 total paid in.
The investment would be worth £276,261

So shows the benefit of drip feeding into a fund. I want to show this in reality over a 12month period.

Regular investment allows you to invest in a fun each month using a fund that allows monthly investment. This then allows one to build up an investment fund and can help to smooth out fluctuations in share prices over time.
For example, let’s say one has £1,800 to invest. We’ll compare buying £1,800 worth of “generic fund” called Asad Investments PLC in January or investing £150 per month over the whole 12 month period:

Month  Share price (p-pence)    No of Shares (bulk)         No of Shares (monthly)
Jan        100                                         1800                                       150
Feb       90                                                                                           167
Mar       105                                                                                         143
Apr        110                                                                                         136
May       100                                                                                         150
Jun        90                                                                                           167
Jul         80                                                                                           188
Aug       95                                                                                           158
Sep       95                                                                                           158
Oct        98                                                                                           153
Nov       105                                                                                         143
Dec       104                                                                                         144
                                                                1800                                       1856
what this shows, if one bought in January @100p that would equate to 1800 shares
If one bought monthly, the £150 each month the total shares bought equate to 1856 shares.

Wealth in Dec: Bulk                     = 1800 shares x £1.04 = £1872
Wealth in Dec: Monthly                = 1856 shares x £1.04 = £1930

invest a monthly sum of £150 into a fund/share. In a month of falling markets, you will get more shares for your money. If the market rises, you will purchase fewer shares, but your existing shares will also be worth more. Over the long term, this means that the average price of the shares you hold may in fact be lower than the average share price for your investment period, since you have bought more shares when the price is lower and fewer when it’s higher. A crude example that shows over the long term one can accumulate securities by taking advantage of market volatility, and potentially gain greater wealth.

UK Government Borrowings: August 2013

Another month, same old story, HM Government, spends more money than it receives via taxes. Another deficit month, thus to bridge the gap, needs to borrow on the bond market.

In August 2013, the HM Government had to borrow money to meet the difference between tax revenues and public sector expenditure. The term for this is The PSNCR: The Public Sector Net Cash Requirement.

There were 4 auctions of Gilts (UK Government Bonds) by the UK Debt Management Office ( to raise cash for HM Treasury:-

20-Aug-2013 0 1/8% Index-linked Treasury Gilt 2019  £1,794,585,000
15-Aug-2013 4½% Treasury Gilt 2034 £2,250,000,000
08-Aug-2013 0¾% Index-linked Treasury Gilt 2034 £1,408,087,000
06-Aug-2013 1¼% Treasury Gilt 2018 £4,931,465,000

When you add the cash raised:-

∑(£1,794,585,000 + £2,250,000,000  + £1,408,087,000 + £4,931,465,000) = £10,384,137,000

£10,384,137,000  = £10,384 Million = £10.384 Billion

On another way of looking at it, is in the 30 days in August HM Government borrowed:-

£346 million each day for 30 days. We are fortunate, the global banking and financial markets still has the confidence in HM Government to buy the Gilts. The budget deficit keeps rising. What is also alarming, is the dates these bond mature, 2018, 2019 and 2034. All long term borrowings, we are mortgaging our futures.

The Vodafone Pension Fund.

Yesterday in the media was the news that Vodafone was selling its 45% in Verizon Business, returning £84 Billion to Vodafone PLC. I thought I would look closer into Vodafone.

It is only you look at the pension fund of Vodafone, one realises how “young” this company is.  []

Vodafone was subsidiary of Racal and in the early 1980’s was known as Racal-Vodafone and was spun out of Vodafone in the early 1990’s to become a standalone listed business. Fast forward on to today, and it is the UK’s 2nd largest company in the FTSE-100. A great success story from the late Ernie Harrison who handed the baton over to Chris Gent.

If you look at the annual pension report [] this is when you understand the “youth” of the company.

 A fund of “only” £1,078,838 = £1.078 Billion (BT’s fund is £38 Billion).

Incredibly only 1796 people are claiming a pension from the fund, 13,726 deferred members (people who have benefits in the Scheme but have not started to take them.)

In total only 15,522 people.

The £1.078 Billion is split over 5 asset classes:

7.6% in UK Equities

55.7% in Overseas Equities

31.6% in Corporate Bonds

4.8% in UK Government Bonds

0.3% in Cash

Interesting to see the over 60% exposure to Equities, as the facts are simple, with only 1796 claiming pensions, the need for fixed income securities to finance these commitments is relatively low. Having exposure to equities that in general over the longer term give higher returns, means the fund has time to grow to fund the future pensions of the 13,726 future pensioners.

Vodafone PLC, just over 5% of the FTSE-100

RSA Insurance & Low Interest Rates

RSA Insurance provides risk cover against its high quality assets.

Formerly known as Royal & Sun Alliance, a FTSE-100 member, is a major global insurance business. Its business is relatively straight forward, it takes in insurance premiums, and pay-outs if disaster hits. It does this, by simply taking on risk from the premium payer (insurance holder) and accepts that risk against the assets the RSA holds.

A simple way to understand the insurance business is to know the “operating ratio.” That is the insurance pay-out (losses it has to pay to holders) against the income it receives.
For RSA that number is 95%

Thus makes a profit, (takes in £100 in premium income, and pays out £95)

The 2012 premiums income was £8,353 Million (£8.352 Billion). The assets that RSA holds to secure itself against losses have to high quality and liquid assets to meet any claim.

RSA holds a £14.3bn asset portfolio (£14,300,000,000) that is made up of government bonds, high quality corporate bonds, cash, equities and property.

Bonds   = 82%
Cash      = 9%
Shares  = 4%
Property= 2%
Others  = 3%

Total = 100%      
A very salient facts from the annual report [].

Page 3: Due to low interest rates, it only managed to have investment income of £515m impacted by the continued low yield environment. (An effect of low interest rates).

A very sobering fact, with £14.3bn of investment assets it is only making a return of £515m. (3.5% return) This shows that insurance companies are struggling to make money in this climate, which in the UK will last at least for 3 years according to the Bank of England.